AddLife AB (publ) (ALIFB) Earnings Call Transcript

Good morning, everyone, and most welcome to the AddLife third quarter presentation. We will take you through the third quarter today, and then you will have opportunity to ask questions. After the call and after the Q&A session, you will have the opportunity to stay on to watch a brief video Normally, these videos are about one of our companies in the group. This time around, since it's a special year for AddLife, we're celebrating 10 years as an independent company. We have a brief video talking about our history with our roots that go actually 120 years back from Bergman & Beving and Addtech and so on. And it describes our entrepreneurial and decentralized business model that has been so powerful for us. So let's now get going. The positive development that we have seen in the company for some time now continued in the third quarter. also saw an increased acquisition activity. Sales increased by 7%, supported by organic momentum, but also acquired growth. Margins strengthened overall up to 11.5%, a strong increase on the Labtech side and a minor decrease on the MedTech side, but still quite stable, I would say. Operating cash flow improved significantly, and we saw that overall sales was really in a positive trend. Advanced products continue to help us grow and improve margins, and we added new products to the portfolio during the quarter. We had a little bit of fewer instrument deliveries during the summer months, which is quite normal. And the ongoing health care dispute that we saw in Spain held us back somewhat. But we saw a stable development good growth in U.K. and Ireland and also in Eastern Europe, a continued strong development. So we're really pleased to note that acquisition activity has really increasedPAUSE -- so we completed the Unichem acquisition during the quarter. And in October, we completed the acquisition of [ Line. ]

Revenue growth in the quarter was 7%. Organic growth was 4% and assuming we just for the endoscopy business and acquired growth contributed with additional 3%. Organic growth of 4% reflects market growth. In Labtech, we had 2% and following a very strong Q3 last year with 9% organic growth and Medtech had 5% organic growth. The adjusted EBITDA increased with 11% and this is, of course, supported by organic growth, mainly driven by increased gross margins and acquisitions contributing with 8%. Adjusted EBITDA excludes contingent considerations. And the earnout has been revaluated -- and in some cases, it has gone up. In some case, it has come down, and there is a positive net of SEK 32 million over the profit and loss. Revenue increased with 7%. Underlying organic growth was 4% and acquired growth was 3%. Gross margin continued to increase. In this quarter, it was 1 percentage point -- this is driven both by price management in the companies, but also by a higher share of advanced products contributing with a higher gross margin. In the quarter, we had unusually high operating expenses. This is due to growth investments into the companies advanced products being 1 of them, but also, of course, operating expenses relating to acquired companies and acquisition costs relating to acquisitions. Extraordinary items is the continued considerations and then the adjusted EBITDA margin increased to 11.5% and profit before tax was up 61%. EBITA margin has clearly improved over the past years. Year-to-date, we were at 12.2% compared to 11.9% last year. The Labtech margin that was 12.9%, a clear year-on-year improvement, mainly driven by stronger gross margins, improvements in the companies and the addition of acquisitions. Medtech margin was 11.3% in slightly below last year, but also here, we see continued positive margin development in selected areas. -- margin expansion remain the top financial prior for us. Operating cash flow increased with 62% in the quarter, and the improvement was mainly and primarily driven by lower working capital tied up. Cash conversion remained strong, above 100%, and working capital efficiency is a continued focus going forward. Operating cash flow was SEK 236 million, and working capital was negative SEK 58 million. Working capital was impacted by collection of accounts receivables, payments of account payables and also inventory increased slightly. And this is partly driven by the introduction of new products, but probably we also have a small buildup entering the fourth quarter and the last quarter of the year. So inventory represented 18% of sales, which is slightly higher compared to the 17% we saw in the first half of the year. Acquisitions relates to Unichem. And looking at the net debt, it was slightly up in the quarter. This was impacted by FX translations, and that had an impact of SEK 91 million in the quarter. When we talk about net debt, we include bank loans, lease liabilities, continued considerations, pension liabilities, the provisions and then we deduct cash. After quarter end, the bank facilities has been refinanced. It's a 3-year term, and there's a 2 1-year extension options in addition. Leverage was at 2.5, which is below the ambition of being at 3% or below. Net debt-to-equity ratio was 0.8 and since a year back, the balance sheet supports both organic and acquisition-driven growth. And with that, I will hand over to Fredrik again.

Labtech had a strong quarter in Q3 and the growth was 7% and with a quite significant acquired additional 5%. EBITDA margin improved significantly to 12.9% compared to 11.2% in the corresponding quarter of last year. Diagnostics remained stable and strong, I would say, and research activity was seasonally a little bit lower during summer, which is a pattern we normally see. Eastern Europe continued to show strong development, supported by investment in advanced technology. And then we're quite happy with the fact that Unichem was added to the mix in the -- towards the end of the quarter. This is a great company that strengthens our position further in Southern Europe. Medtech also had a strong quarter with a good growth and addition of acquired growth as well. EBITA margin was slightly lower, 11.3% versus 11.6% in the corresponding quarter of last year. Nordics delivered a really good growth, while Spain was still affected by the ongoing health care dispute that we have seen now for some time. U.K. activity improved with higher surgical volumes, and the delivery of capital goods that were ordered in the previous quarter that we highlighted at that time. So we're really pleased to see that those deliveries are indeed happening. Home Care continued to develop well, further strengthened by the acquisition of Lehnen after the closure of the quarter, this is also very much in line with the strategy that we have communicated. So moving on to the acquisitions. So very warm welcome to Unichem. We're happy to welcome them to the team and to the AddLife family. This is a Portuguese company focusing on advanced analytical laboratory equipment, primarily in the areas of chromatography, spectrometry and microwave technology. They are really well renowned in the market for a super strong technical and clinical and application service. So this fits really well into the model that we have. So this will, of course, become part of the Labtech business. In October, we were very pleased to complete the acquisition of Lehnen, a company that will become part of the home care business. Lehnen is a family-owned company with manufacturing of high-quality stainless steel products. They have a strong position in the German market and other markets in Central and Eastern Europe. So they are a very nice addition to the home care business. So we wish that Lehnen and team, a warm welcome to the AddLife family. Decentralization and entrepreneurship is really part of the Ad Life DNA as many of you know, and you can also see if you decide to stay on to watch the video after the Q&A session. It is a powerful model, and it is something we're living really in our day-to-day activity. I want to give you a few examples of what we have recently done. MBA, a successful company in Spain and Portugal have created specialized division to drive the respective product portfolio that has proven to be extremely successful in healthcare 21. We have organized in country-specific organizations, and we have created specialized commercial divisions with a high level of autonomy. And finally, in addition, we have removed a significant group function and really, again, decentralized decision-making and responsibility to the local entities. So all of these measures have been very successful in efficiency and drive and agility. So what are the, in summary, the benefits of our decentralized model? I think it makes us agile and efficient. The subsidiaries have the freedom to act quickly and work efficiently close to customers and suppliers. That's very important. Also in M&A, we can really use our deep market knowledge and have a higher capacity for acquisitions. So the acquisition work has been delegated to the business unit leaders, and they own the acquisition funnel and they are supported by the experienced advisers as well as the subsidiary resources. And finally, decentralization certainly attracts and retains talent. It helps us give opportunity for people to develop and evolve. It also attracts individuals and also, last but not least, is very attractive to potential acquisition targets that we are in dialogue with. So decentralization has been a part of our model for 120 years now, and it's still a very powerful piece of the AddLife DNA. So moving on to a summary and outlook. We do see continued consistent positive development, and that's fantastic. Sales, earnings, operating cash flow developed well in the quarter. We see stable development in the Nordics and good growth in U.K. and Ireland and strong development in Eastern Europe. We are continuing to introduce and drive advanced products, and I'm pleased to note that we have, during the quarter, added important product portfolios to the mix. The decentralized model continues to support efficiency and agility, and it helps us drive acquisition, attract, develop and retain talent. Finally, we are pleased to note that we are seeing an increased acquisition activity and we have been for a while and continue to strengthen resources in that area. So we can expect a continued high acquisition activity going forward. So with that, we open up for questions.

Okay, everyone. I think we are ready for questions, and we have Albin. I think you raised the hand first. So please go ahead, Albin, don't forget to unmute.

Just wanted to start off with the centralized stuff you mentioned in the Admission and other. And of course, this is something that you believe in long term, but is it possible to quantify the direct effect of those measures you expect in the coming quarters?

That's a great question. I think it is a very powerful model and something we do continuously not only how -- when we make acquisitions, but also how we take care of the companies we already have. I don't think we can quantify exactly the impact of it. I think in addition, it clearly led to a significant cost reduction. That was absolutely so. But I think probably the most important factor is is an increased responsibility and increased drive increased efficiency among the companies and the divisions that are given that extra trust, so to speak. So I think that's harder to measure, but it's very tangible. It's very clear. motivation, drive speed customer focus. We all know that's important, but it's hard to measure it, I would say. So sorry, we can't give you a firm number on that, but I think it's clearly have been cost and more importantly, drive more business.

All right. Fair enough. And then I guess how much of the cost increase operating cost here is like resources for new advanced products like M&A team buildup and transaction because I think Christina said something about it, but if you can split the OpEx growth. And also quantify maybe, yes, what's normal?

I think the main increase in the quarter is relating to sales PAUSE eyes definitely for sure. And I think that looking at the gross margin, that has increased with 1%, it's really driven by the addition of advanced products with higher margins that also reflects on the OpEx. That is the majority. We are building the organization to be able to handle those more advanced products and also the additional new product portfolios. And sometimes you need to have the resources before you really have seen the same, which is the case a bit in this quarter. So yes, I would say, sales driven, definitely.

Okay. That's clear. And then just the last one for me. Italy, down from EUR 170 million to EUR 141 million in sales here in Q2. What's -- what happened in Italy is the timing or structural or

Yes. I would say timing, I think it's -- we have a lot of research related business in Italy. We have -- we are selling normally quite a lot of advanced instruments there. that normally slows down a little bit in the summer months that happened this year as well. And that I think has also been a little bit of an effect of EU funding and so on that has been higher at a certain period and now a little bit lower. So a mix of those 2, I would say, but nothing alarming. We are -- it's a stable and solid business we have there. So let's move on. So I think we have Gustav here. So are you ready for us?

Yes. I thought maybe just -- I mean, to build a bit more on decentralization you've done here on the platforms. But maybe can you talk a bit about the changes the M&A organization. How does it look now compared to 5 years ago? And then also, should we expect more deals to be closed internally now than previously?

Yes. I think we should expect more deals that we are able to find ourselves through the organization. I think we have gone from responsibility more centralized for the M&A to clear responsibility with the business unit leaders. So each business unit leader is driving their own acquisition in Jan. And of course, they are closer to the business. They are quite knowledgeable in their respective fields. So they drive it. They are -- they have the ability to find good targets. They have the ability to really assess the quality of the targets as well. And they they find them, they're good at that. And then of course, when the acquisition happens, they are the ones responsible for taking care of it going forward as well. So that's quite important. That's an important dynamic. So -- and then, of course, they do get support from their respective companies, of course, to go up and find companies and assess them. We have also introduced a group of senior advisers, people who have worked for us in the past as CEOs and business unit leaders, they support the work of identifying, contacting assessing companies. So they work also together with a business unit leader. And then on top of that, we have been building up transaction capabilities. So we have 2 people working on transactions purely closely then together with the business unit leaders. And we are -- in addition to that, we are adding even more resource on the lead generation side, our proactive approach to analyze markets, identify potential targets, contact them on our own, so to speak, so that the vast majority of the companies that we are in process with are indeed exclusive dialogues. And many times, companies we have found ourselves, and we expect that to continue and become even stronger probably within continued strengthening of the M&A activity. So now we have -- each business unit that has to fund it on their own. So there's more manpower and more manpower close to the market.

That's very helpful. And can we just get some sense of the current pipeline now compared to 1 year ago?

Well, I think the pipeline looks quite good, and it is more like 4 or 5 different pipelines, right? So -- so that makes it more resilient and more deep many more companies, more dialogues continuously ongoing. So that works well.

Perfect. And then just moving on to Medtech. Is it possible to give a bit more color on the slightly softer margin. Is that mainly due to the strikes in Spain and also the slightly weaker performance in 1 of the subsidiaries that drove the sort of positive one-offs? Or are there anything else?

No. I think it's partly, of course, that we are in the middle of -- or we were in the middle of the summer months, then we normally see less activity, and that's primarily in elective surgeries. So that kind of slows us down a little bit. At the same time, we have been building resources for the increased or increased share of advanced products, right? So we have taken a little extra cost to support those more advanced products. And of course, we have to see that the gross margin is coming up in both business areas. So it's working, so to speak. But of course, when you have that a little bit extra cost and then slightly lower volume during the summer months that has a little bit of a negative impact on the margins. But there's nothing that we are worried about over the long term. I think we see more of an investment for future growth in high-margin areas. All right. Thank you very much. So then we have Sten. Are you ready for us?

Yes. Thank you for -- so I'm happy to hear you talk about future margin improvements. And I guess you have elaborated a little bit on it. But could we perhaps go back to some of the drivers here? And what's the scope and time line for this. Is this from internal work? Or do you -- is it from recently acquired companies you expect to drive these improvements? Or where -- can we find the the drivers for future margin improvements and also a little bit maybe on the time line. Is this like gradually over the coming years or yes, if you could give us some color on that would be very helpful.

Yes. Thank you. First of all, I mean, we always work with margin improvements, cost reduction, efficiency improvements cutting out low-margin products and so on. So that's kind of day-to-day business, right? But on top of that, I think there are 3 major areas where we can see margin improvements going forward. And one is -- there are a handful or 2 companies that are maybe not performing at the level that we want them to. So we have targeted programs them. And I'm really pleased to note that, that's really making some nice progress. We were seeing clear and tangible and long-term results of that. So that's quite positive. And we touched upon advanced products, right? So -- just as we're quite -- we don't stick to products that are becoming commoditized or under margin pressure, we cut them out, but we replaced them with advanced products and mass products that really have a chance to alter the way the health care system is working to improve efficiency and that aligns very well with value-based procurement and so on, that being emphasized in country. So adding even advanced products increases the gross margin. That's evident in the numbers, but it also requires us to be able to support a customer at the clinic, at the lab to make it work in their hands. That makes us a trusted partner, right, but there's a cost associated with it. But I think that's -- that's another one, clearly. And then, of course, acquisitions, we are pleased to note that the acquisitions we have made over the past few years have all been at margin levels clearly above the group average. So absolutely, they are contributing to margin increase as well. So day-to-day, efficiency measures and then focusing on those few companies are not quite at the level we want them to be adding new products and acquisitions with high margins. So that's the formula we're working on, and I think we're seeing results of it. But it can vary a little bit quarter-to-quarter, but the long-term trend is clearly there. So I hope that was an answer to your question [indiscernible]

Sure. No, absolutely. Would it be possible to sort of quantify the share of the business today, I guess, I mean, we have seen the home care business now is, I guess, not dilutive to the margins, but would it be possible to quantify the amount of companies in terms of sales that are not performing according to your expectation?

Yes, it would be. Yes, I think we talked about when we had

That's right, sir. Now we have this matrix where we have profitable working cap and the EBITDA margin. And if you're down in the left-hand corner based on total revenue, I think we were at around 25% -- now that has gone down 25%, it was around 20%, and that is, of course, progressing and improving year-over-year. And it's not only that you out of the box, which is a 10% EBITDA margin and 45% profitable working cap. It might also be that you move inside of that box, of course. And then the aim is to have everyone up in the right-hand corner. But -- so yes, so that percentage of revenue has gone down over the years, and we are continuing to work on that push out of that line.

Yes. So good progress, but there is more work to do.

Yes.

Good question. So Zino, are you ready for us?

Yes. And hopefully, you're ready for me. If we go back to Medtech and talk a bit about the margin, I think you mainly relatively clear that the investments you're making there is maybe diluting a bit in the quarter, but you also highlight that you converted these equipment or capital equipment in the U.K., which we've talked about before. Can you help us understand the possible positive effect that you -- that came from that?

Yes. I think in the previous quarter, we talked about the fact that even though -- the start of the year had been a bit slow in U.K. We did see capital orders increase in capital sales have been quite slow in the first half of the year. So we saw those orders starting to come in. And we were pleased to note that many of those deliveries actually did happen now in Q3. So that's a good sign. And of course, it helps sales and margins as well. And then on top of that, of course, number of surgical procedures is normally a bit low in -- during the summer months, but there was a positive trend in surgical procedures performed in U.K. So that's also positive sign. The weighting list are still on, and they are not coming down, but the procedures performed increased a little bit. So I think it's a more positive environment in the U.K. right now compared to what we saw earlier in the year. So we're pleased to note that, of course. So I can't give you an exact number how much is each of those factors. But clearly, improvement is there and a little bit more optimistic outlook. Did that answer your question Zino?